On Paying Buyer's Brokers
Even for full service, it is not difficult to find a broker who will list your property for a dramatically less-than-average sell side fee. The primary reason commissions remain stubbornly high is the amount that sellers continue to offer the buyer's broker. I think out of fear that brokers will not show their property, or will steer buyers away from it. But in this mature internet age, brokers cannot hide your house from buyers. Weigh the pros and cons, do the math, and then pay them whatever makes sense to you.
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The real estate business used to be fairly static. A seller would hire a listing broker to sell his house. The listing broker would charge the seller six percent. The listing broker would then offer any other broker half of the six percent to bring a buyer. So the two brokers would each make three percent. And all was right with the world.
Then some broker somewhere decided that, yeah, I still do pretty darn good if I charge five-and-a-half percent. I will still pay the buyer's broker his expected three percent. And yes, I will only make 2.5% myself, but you know, that's not bad. And I am more competitive than other brokers, so hopefully I will get more business.
We all know what happened after that. The 2.5% has fallen all the way down to $500. And sure, you get what you pay for. But we’ve talked about that.
While the amount retained by the listing broker now varies dramatically, the amount typically paid to the buyer's broker remains stubbornly static: Yes, we will list your property entry-only9 for $500, but our sincere advice to you is to pay the buyer's broker three percent, because that is what everyone else is paying. Or, we will give you a full service listing for one percent, but our sincere advice to you is to pay the buyer's broker three percent, because that is what everyone else is paying.
And look, at four percent total, that's a one-third discount off the original six percent. Not bad.
But this business of paying the buyer’s broker a full (or traditional) commission is a holdover from the days when the buyer’s broker was the one finding the houses to show the buyer. And sure at that time, sellers and listing brokers were very much aware that the buyer’s broker could simply overlook any property and the buyer would never see it. So by golly, they made sure not to give the buyer’s broker an incentive to do so.
But who finds the houses today? The buyer himself. And even if the buyer’s broker happens to be the one finding most of the houses, I assure you the buyer is still looking as well. Today there is no possibility whatsoever of a buyer’s broker hiding a house from a buyer.
So let’s take an example using our typical $500,000 house. And let’s say the seller is paying a two percent commission ($10,000) to the buyer’s broker, rather than the typical three percent ($15,000). Is a broker not going to show the house because the seller is paying ten rather than fifteen? And if not, how is that broker going to explain to his client, a potential buyer for the house, that $10,000 is not enough?
But brokers can be pretty brazen. The broker could say, well remember Mr. Buyer when you hired me, I told you that I charge three percent. And that if a seller paid me less than three, that you, as the buyer, would have to pay me the difference. So, if you buy this house, you will have to pay me $5,000 at closing.
Let’s stop here for a question: Are brokers in fact having this discussion with their buyers?
Well for the most part, no, they are not…unless and until this situation arises. So it is at that point, after the house has been found, that the broker must explain to his buyer that, no, $10,000 is not enough. Awkward.
But it is possible. However, I submit that the following is at least as likely:
The buyer’s broker says to himself, you know, $10,000 is a pretty decent commission; I think I’ll just take that and be happy with it. Sure, I’ll mention it to my buyers if there is an opportunity to do so without being crass. And maybe the broker also thinks: Besides, I have my buyer’s current house for sale, so I’ll get paid on that as well.
Right?
So sellers, if your listing broker suggests a five percent total commission (two percent to the listing broker and three percent to the buyer’s broker), you might consider paying both brokers at the two percent level. And yes, the price point of your house is an important factor in this consideration.
Like I said: Weigh the pros and cons, do the math, and then pay them whatever makes sense to you. There is no need to blindly pay whatever is typical or even what your broker says you must.
Now one thing to watch for here: Most real estate contracts include a provision for seller-paid buyer expenses. So the seller may well be adamant that he is only going to pay the buyer’s broker two percent. Nevertheless, the offer may include a provision for the seller to pay some of the buyer’s expenses. Maybe the buyer asks for, say for example, one percent of the Purchase Price. Then, at closing, the buyer uses that money to pay the other one percent of the buyer’s broker’s fee. Just be aware of the possibility and know that this figure is negotiable like everything else. And this figure is often zero.
Another possibility: After you negotiate the contract, the buyer asks: Look I really need to pay my broker more, could we raise the Purchase Price one percent and add one percent to the seller-paid buyer expenses? Sure, why not? Because at the end of the day, all the seller should care about is his net. But in this case, just be aware that the property may not appraise for this new Purchase Price. So if you then agree to lower the Purchase Price to meet the appraisal, just make sure you also lower the seller-paid expenses.
But here, we are getting more into the weeds of the contract than is the intent of this book. But that is okay; it is, I hope, another demonstration of the value of competence and integrity.
Before we leave this topic, could we briefly discuss paying the buyer’s broker even less? Returning to our $500,000 example, what if the seller says, I can only afford to pay (or I am only willing to pay) the buyer’s broker one percent? That is $5,000. I think at that point, it is again worth asking: Is that enough? I am not going to answer this question for you. It is entirely personal preference. I will tell you that, like almost all brokers, I have often worked for commissions less than that amount. And on properties much more difficult to sell than a typical $500,000 home.
Just note that one percent of a million dollar home is a lot more than one percent of a one-hundred thousand dollar townhouse.
Just as we discussed earlier, I am in favor of more thoughtful pricing, more diverse pricing, and more value pricing. Maybe this leads to flat fees or tiers of flat fees (for both sides). Whatever. But charging a static six percent (total) or three percent (buy side) begs the question:
What is this worth?
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9. Entry-only listings means the listing broker will enter the property into the Multiple Listing Service (MLS) only. The broker provides no additional services.